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Issue and Redemption of Debenture

Debenture: It is a document acknowledging a debt against company which is issued by the

company under common seal of the company and contracting to pay principal along with

interest up to a specified time.

As per Section 2(12) of the Companies Act, 1956:

Debenture include debenture stock, bonds and any other securities of the company

whether constituting a charge on the company’s assets or not.

Types of Debenture:

(1) Secured Debenture: Debenture secured against fixed charged or floating charge.

(2) Unsecured Debenture: Debenture which have no security.

(3) Redeemable Debenture: Debenture which is repaid after a specified period or by

installment during the existence of the company.

(4) Irredeemable Debenture: Debenture which is not repayable during life time of the

company i.e. repayable only at the time of liquidation.

(5) Registered Debenture: When name, address and particulars of debenture holder are

entered in a register kept by the company is known as registered debenture.

(6) Bearer Debenture: When debenture are transferable only by delivery. The company

keeps no record of such debenture holders.

(7) First Debenture: Debenture which repaid on priority than other is known as First

Debenture.

(8) Second Debenture: Debenture which repaid after the First Debenture is known as

Second Debenture.

(9) Zero Coupon Rate Debentures: Debenture which do not carry Coupon Rate is known

as Zero Coupon Rate Debenture. In this company issue debenture on a heavy

discount. The difference between the redeemable value and issued value is known

as interest on debenture.

(10) Convertible Debenture: When debenture holders are given an option to convert

their holding into Debenture in part or as a whole after a specified time is known as

Convertible Debenture.

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Journal Entries at the time of Issue of Debenture:

(I) When Debenture are issue for Other than Cash:

(i) Debentures are issued for purchasing of Assets:

Transaction and Journal Entries

For Purchasing Assets

Assets A/c Dr. To Vendor A/c

At Par At Premium At Discount

For Issue of Debenture

Vendor A/c Dr. To Debenture A/c

Vendor A/c Dr. To Debenture A/c To Sec. Pre. A/c

Vendor A/c Dr. Dis. on Issue of Deb. A/c Dr. To Debenture A/c

(ii) Debenture are issued for purchasing Business:

Transaction and Journal Entries

For Purchasing Business

Assets A/c Dr. G/w A/c (bal. fig.) Dr. To Vendor A/c To Liabilities A/c To C.R. (bal. fig.)

At Par At Premium At Discount

For Issue of Debenture

Vendor A/c Dr. To Debenture A/c

Vendor A/c Dr. To Debenture A/c To Sec. Pre. A/c

Vendor A/c Dr. Dis. on Issue of Deb. A/c Dr. To Debenture A/c

(II) When Debenture are issue for Cash:

(i) Debenture Payable in Lump Sum:

Transaction and Journal Entries

Receiving Deb. App. money

Bank A/c Dr. To Deb. App. A/c

At Par At Premium At Discount

For transferring Deb. App. money to Debenture A/c

Deb. App. A/c Dr. To Debenture A/c

Deb. App. A/c Dr. To Debenture A/c To Sec. Pre. A/c

Deb. App. A/c Dr. Dis. on Issue of Deb. A/c Dr. To Debenture A/c

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(ii) Debenture Payable in Installment:

Receiving Deb. App. Money

Bank A/c Dr. To Deb. App. A/c

For transferring Deb. App. money to Debenture A/c

Deb. App. A/c Dr. To Debenture A/c

For Amount due on allotment

Deb. All. A/c Dr. Deb. All. A/c Dr. Deb. All. A/c Dr. To Deb. A/c To Deb. A/c Dis. on Deb. A/c Dr. (At Par) To Pre. A/c To Deb. A/c (At Pre.) (At Dis.)

For receiving amount due on allotment

Bank A/c Dr. To Deb. All. A/c

For Amount due on Ist & final call

Debenture Ist & final call A/c Dr. To Debenture A/c

For receiving amount due on Ist & final call

Bank A/c Dr. Debenture Ist & final call A/c

(III) Issue of Debenture with terms of Redemption:

S. No. Condition of Issue Condition of Redemption

1. Issue at Par Redemption at Par

2. Issue at Premium Redemption at Par

3. Issue at Discount Redemption at Par

4. Issue at Par Redemption at Premium

5. Issue at Premium Redemption at Premium

6. Issue at Discount Redemption at Premium

Journal Entry For Issue of Debenture with terms of Redemption:

S. No. Transaction Dr. Cr.

1. Issue at Par & Redemption at Par Bank A/c Dr. To Deb. App. A/c Deb. App. A/c Dr. To Debenture A/c

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2. Issue at Premium & Redemption at Par Bank A/c Dr. To Deb. App. A/c Deb. App. A/c Dr. To Debenture A/c To Sec. Pre. A/c

3. Issue at Discount & Redemption at Par Bank A/c Dr. To Deb. App. A/c Deb. App. A/c Dr. Dis. on Issue of Deb. A/c Dr. To Debenture A/c

4. Issue at Par & Redemption at Premium Bank A/c Dr. To Deb. App. A/c Deb. App. A/c Dr. Loss on Issue of Debenture A/c Dr. To Debenture A/c To Premium on Redemption of Debenture A/c

5. Issue at Premium & Redemption at Premium Bank A/c Dr. To Deb. App. A/c Deb. App. A/c Dr. Loss on Issue of Debenture A/c Dr. To Debenture A/c To Sec. Pre. A/c To Premium on Redemption of Debenture A/c

6. Issue at Discount & Redemption at Premium Bank A/c Dr. To Deb. App. A/c Deb. App. A/c Dr. Dis. on Issue of Deb. A/c Dr. Loss on Issue of Debenture A/c Dr. To Debenture A/c To Premium on Redemption of Debenture A/c

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Sources of Redemption of Debenture

Fresh Capital Sale of Assets Utilise the Profit Surplus Fund

Method of Redemption of Debenture:

1. Lump Sum Payment Method;

2. Draw of Lots Method;

3. Purchase in the Open Market Method;

4. Conversion Method.

Lump Sum Payment Method

Transaction At Par At Premium At Discount Amount due to Debentureholders

Debenture A/c Dr. To Deb. Holders A/c

Debenture A/c Dr. Pre. on Red. of Deb. A/c Dr. To Deb. Holders A/c

Debenture A/ c Dr. To Deb. Holders A/c To Profit on Red. of Deb. A/c

Amount Paid to Debentureholders

Deb. Holders A/c Dr. To Bank A/c

Redemption of debenture out of capital and out of profit

(1) Redemption of Debenture out of Capital

Redemption of debenture out of capital means redeeming of debenture by issue of fresh

capital. This method is used when there is no surplus profit available for redemption of

debenture.

(2) Redemption of Debenture out of Profit

Redemption of debenture out of profit means redeeming of debenture by transferring of

profit from P&L App. A/c to Debenture Redemption Reserve A/c (DRR A/c).

As per SEBI guidelines, an amount equal to 50% of the debenture should be transferred to

DRR.

Journal Entries for Redemption of Debenture out of Profit

S. No. Transaction Dr. Cr. 1. For creating DRR

P&L App. A/c Dr. To DRR A/c

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2.

For Amount due to Debentureholders i At Par Debenture A/c Dr. To Deb. Holders A/c ii At Premium Debenture A/c Dr. Pre. on Red. of Deb. A/c Dr. To Deb. Holders A/c iii At Discount Debenture A/ c Dr. To Deb. Holders A/c To Profit on Red. of Deb. A/c

3.

For Payment of Amount to Debentureholders Deb. Holders A/c Dr. To Bank A/c

Purchase in the Open Market

S. No.

Transaction

Dr.

Cr.

1.

Purchased in the open market for immediate cancellation i for purchasing of debenture Own Debenture A/c Dr. To Bank A/c ii for cancellation of debenture x% Debenture A/c Dr. To Own Debenture A/c To Profit on Cancellation of Debenture A/c iii for profit on cancellation of debenture transfer to capital reserve Profit on Cancellation of Debenture A/c Dr. To Capital Reserve A/c

2.

Purchased in the open market for Investment purpose i for purchasing of debenture Investment in Own Debenture A/c Dr. To Bank A/c

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ii for resale of debenture Bank A/c Dr. Loss on Sale of Own Debenture A/c Dr. To Investment in Own Debenture A/c To Profit on Sale of Own Debenture A/c iii for profit/loss transfer to P&L A/c For Profit: Profit on Sale of Own Debenture A/c Dr. To Profit & Loss A/c For Loss: Profit & Loss A/c Dr. To Loss on Sale of Own Debenture A/c

Conversion Method

Transaction At Par At Premium At Discount Amount due to Debentureholders

x% Debenture A/c Dr. To Deb. Holders A/c

x% Debenture A/c Dr. Pre. on Red. of Deb. A/c Dr. To Deb. Holders A/c

x% Debenture A/c Dr. To Deb. Holders A/c To Profit on Red. of Deb. A/c

Issue of Shares or Debenture to Debentureholders

Deb. Holders A/c Dr. To Shares A/c To y% Debenture A/c

Deb. Holders A/c Dr. To Shares A/c To y% Debenture A/c To Sec. Pre. A/c

Deb. Holders A/c Dr. Dis. on issue of Sh./Deb. A/c Dr. To Shares A/c To y% Debenture A/c